Consider the following cash flows on two mutually exclusive projects for the Bah
ID: 2789868 • Letter: C
Question
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation. Both projects require an annual return of 16 percent.
a-1. Compute the IRR for both projects. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
a-2. Based on the IRR, which project should you choose?
Submarine Ride
Deepwater Fishing
Year Deepwater Fishing New Submarine Ride 0 $ 980,000 $ 1,910,000 1 400,000 960,000 2 534,000 830,000 3 450,000 810,000Explanation / Answer
Internal rate of return is the rate at which if we discount all the future cash flows, the resulting NPV will be zero, it is minimum rate of return that management seeks from the project, IRR of the asset/project must be greater than the required rate of return, otherwise it will not be feasible for the management to accept the project. Best way to calculate IRR is using Excel.
Year
Deepwater fishing
New Submarine
0
-980000
-1910000
1
400000
960000
2
534000
830000
3
450000
810000
IRR
19.02%
17.75%
Formula
=IRR(select the entire cash flow )
Deepwater fishing will be selected, because it has higher IRR
Year
Deepwater fishing
New Submarine
0
-980000
-1910000
1
400000
960000
2
534000
830000
3
450000
810000
IRR
19.02%
17.75%
Formula
=IRR(select the entire cash flow )
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